It’s a good time for founders in China to take their startups public, at least by one measure.
Chief executive officers are beginning to get ten-figure bonuses with their initial public offerings. In the latest example, the CEO of Shanghai-based Pinduoduo Inc., received at least $1 billion of stock without any performance hurdles as his e-commerce company prepares for a U.S. IPO. Lei Jun, the head of Beijing-based smartphone maker Xiaomi Corp. saw a $1.5 billion payday, with no strings attached, when his company went public in July. When JD.com Inc. went public in 2014, it incurred $591 million of costs from a stock grant to its chief.
The concept of an IPO bonus that’s not tied to future performance metrics is unusual because a public offering is already a way of compensating CEOs and their lieutenants. Founders like the heads of Pinduoduo, Xiaomi and JD already hold substantial stakes and would become billionaires even without the extra payout. That raises concerns that such rich paydays are coming at the expense of future shareholders, and could push startups to take on public investors even if they’re not ready.
“Generally we regard any pay package that doesn’t align pay with performance not in the best interest of shareholders,” said Michael Cheng, vice president of ESG Research at MSCI Inc. “Share awards that don’t come with performance metrics defeat the whole purpose of equity retention policies, which are meant as incentives to executives to create value for the company and all shareholders.”
Colin Huang, the head of Pinduoduo, may soon have an $8.3 billion fortune, based on his holdings in the e-commerce operator and the IPO bonus. That would make him among the 25 richest people in China, according to the Bloomberg Billionaires Index.
In April, Pinduoduo issued more than 250 million shares, worth at least $1 billion, to a company controlled by Huang, according to the filing. While the filing doesn’t specify any strings attached or performance metrics, it does say Huang plans to donate some stock to two charitable foundations that he intends to establish.
Pinduoduo, which is backed by Tencent Holdings Ltd. and known as PDD, plans to go public in the U.S., offering 85.6 million American Depository Shares at $16 to $19 apiece, according to a stock exchange filing. Huang will own 46.8 percent after the IPO assuming an over-allotment option isn’t exercised while also controlling the vast majority of its voting power.
The $8.3 billion fortune is based on the low end of the pricing range. The top end would mean a net worth of $9.9 billion, making him the 16th-richest person in China, ahead of Richard Liu, the founder of China’s No. 2 e-commerce operator JD.com.
PDD declined to comment.
The idea of an IPO bonus may have more justification than just helping founders get richer. Startups have been staying private longer than before, in part because there has been plenty of private capital to keep them going. An added payout may motivate founders to go public sooner so venture capital backers can cash out. It can also encourage founders and CEOs to put on a good IPO roadshow, secure top cornerstone and strategic investors, and drum up demand to push IPO prices higher. IPO bonuses also serve to bulk up the founder’s shares, which may have been diluted through multiple fundraising rounds.
“The home run for the CEO is to take the company public, so just achieving the IPO is the incentive,” said Joe Chan, a partner at Mindworks Ventures. “Maybe the disclosure in the prospectus says the shares were given months before the IPO but these agreements can be made years before the IPO and are often driven by late-stage investors who want a good exit sooner rather than later.”
There’s also a theory that IPO bonuses provide founders with a piggy bank to make good on existing obligations or dole out shares as they see fit. Once companies are publicly listed, they can be subject to more stringent disclosure and corporate governance rules such as constraints on how much stock can be awarded to executives and what they can do with the shares.
For instance, a gifting culture prevails in mainland China and the chairman or CEO may want to stockpile shares they can personally give to employees and partners on behalf of the company, said Rocky Lee, international partner at King & Wood Mallesons in Beijing.
“This is the one time when the chairman can personally reward people for having contributed to the company’s success,” Lee said.
Tesla Inc. put in place a pay package for Elon Musk that could be worth as much as $55.8 billion over the next decade. But he only gets the compensation if the electric-car company meets metrics such as expanding revenue to $150 billion and boosting market value to $650 billion.
In Xiaomi’s case, Lei Jun was already the largest shareholder and had majority voting rights. So when the company disclosed the extra $1.5 billion award without any attached performance goals, the windfall drew questions from investors. The award was also listed in the prospectus’ risk factors, warning investors the issuance would result in significant share-based compensation expenses and dilute existing shareholders’ holdings. Xiaomi President Lin Bin said at a June press conference that its board chose to give Lei the reward for the past eight years of devotion.
“There are very few occasions to grant a stock award this big without any conditions,” said Frank Bi, a partner at law firm Ashurst in Hong Kong focusing on IPOs, compliance, and mergers and acquisitions. “This should be a red flag in terms of corporate governance for investors.”